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Unformatted text preview: ORIE 350 Fall 2007 Homework #2 Due September 11, 2007 1. Sonora Capital Inc. is preparing year-end adjusting journal entries. On November 1, 2006, Sonora paid for a 6-month insurance policy in effect from November 1, 2006 until April 31, 2007 with a check for $1,200. The company found itself with more office space than it needed, so it rented out a portion of its office building to a start up company, iPops. Due to the risky nature of this business, iPops was required to pay the entire years rent in advance. iPops paid for 12 months of rent on December 1, 2006 for the period December 1, 2006 to November 30, 2007 with a check for $18,000. a. Provide the adjusting journal entry that Sonora Capital must make for the insurance policy at their fiscal year end, December 31, 2006. Dr Cr Dec. 31, 2006 Insurance Expense 400 Prepaid Insurance 400 b. Provide the adjusting journal entry that Sonora Capital must make for the office space rental at their fiscal year end, December 31, 2006. Dr Cr Dec. 31, 2006 Advances from Tenants 1,500 Rent Revenue 1,500 (2.17, Office Depot; asset recognition and valuation.) a. Prepaid Rent (current asset), $125,000; Security Deposit (noncurrent asset), $130,000. b. Leasehold Improvements (noncurrent asset), $36,500 (= $10,000 + $6,500 + $20,000). These expenditures prepare the rented facility for its intended use as a retail store. c. Equipment or Fixtures (noncurrent asset), $31,400 [= .98 X $30,000) + $1,200 + $800]. The latter two expenditures prepare the display counters for their intended use. d. Accounting does not recognize an asset for the future services of employees. e. Accounting does not recognize any portion of expenditures on advertising as assets because any future benefits of the advertising are too uncertain. f. Merchandise Inventory (current asset) $145,600 [= (.98 X $120,000) + $40,000 $12,000]. One might argue that Office Depot should reduce 3-1 Solutions the acquisition cost of the $28,000 (= $40,000 $12,000) of merchandise that it has not yet paid for by the 2 percent discount. It is possible, however, that cash discounts are not available on this merchandise. If Office Depot takes advantage of any discounts when it pays for this merchandise, it will reduce the acquisition cost at that time. (2.19, Kansas City Royals, Inc.; liability recognition and valuation.) a. Accounting normally does not recognize a liability for mutually unexecuted contracts. When the player renders services, a liability arises....
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